Before we dive into the “Buffett Indicator,” I want to share a quote from the Oracle of Omaha himself:
“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now.”
That quote, which is from an op-ed Warren Buffett wrote in 2008 for The New York Times, provides some important context: Warren Buffett (and, by extension, Berkshire Hathaway) is not practicing market timing, and the indicators and valuations that he watches are not precise market-timing tools.
In other words, what we’ll highlight today as warnings for investors shouldn’t inspire you to immediately flee to cash. These aren’t sell signals, per se.
But, given that Warren Buffett is our greatest living investor, it’s worth paying attention to the moves he makes (or doesn’t make).
And right now, Mr. Buffett is content to stockpile cash.
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As of the end of Q2, Berkshire Hathaway’s cash holdings are $344.1 billion, near last quarter’s all-time high level and roughly one-third of Berkshire’s market cap.
That’s up from $334.2 billion at the end of 2024 and nearly double the $189.0 billion Berkshire held in reserve before the company started meaningfully raising cash last year, in March 2024. Both of those totals were also record highs at the time.
Why? Why is Berkshire Hathaway holding so much cash while the stock market hits new highs time after time?
After all, in the latest letter to Berkshire shareholders, Buffett expressly stated that he’d rather not be holding cash (bolding for emphasis is mine):
“Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities – mostly American equities although many of these will have international operations of significance. Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.”
Presumably, Buffett is looking out at the market and seeing a lack of meaningful long-term opportunity, or, more appropriately, a lack of meaningful long-term value.
Which brings us to the Buffett Indicator.
The Buffett Indicator, in a Nutshell
The Buffett Indicator is simply the ratio of the Wilshire 5000 index (market cap of all Wilshire 5000 stocks) to the U.S. GDP, and Buffett previously referred to it as “probably the best single measure of where valuations stand at any given moment.”
The chart of this ratio, from longtermtrends.net, is below.
As you can see, this ratio is at an all-time high.
It’s been trading above an eye-watering 200% since June and is currently at an astronomical 219%.
Further quoting Warren Buffett from a 2001 article in Fortune:
“For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%—as it did in 1999 and a part of 2000—you are playing with fire.”
It should be noted that that quote is nearly 25 years old, and the ratio itself has been trending higher over the years, as you can see in the following chart.
That chart is from the end of the first quarter, but the ratio and “fair value” are roughly the same today, and both suggest that the market is historically overvalued – but not as overvalued as the quote from 2001 may lead you to believe, given the rising historical trendline.
So, if the Oracle of Omaha is content on the sidelines, and one of his preferred valuation measures is flashing warning signs, what’s a retail investor to do?
If you’re a momentum investor, defer to the momentum. After all, that’s not the game Buffett is playing (and maybe pay close attention to what Mike Cintolo is doing in Cabot Growth Investor).
If you’re a long-term investor, stick with the plan.
That’s the appeal of taking a longer-term approach. It acknowledges both the historical advantages of investing (and staying invested) and the difficulty in making market predictions.
And, lastly, if you’re engaged in a bit of both, make sure you’re following your own profit-taking guidelines.
In a bull market, it’s easy to let your big winners grow to an outsized chunk of your portfolio. By incrementally taking profits, you’re ensuring that you won’t be overexposed in the event of a downturn and that you’ll have some dry powder to deploy when valuations eventually revert to more reasonable levels.
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*This post has been updated from a previously published version to reflect market conditions.
